Natural Gas, OPEC+, EIA, Commodities – Talking Points:
- Natural gas prices at risk of reversal after surging over 23% in August.
- Record US industrial consumption in July fueled the recovery in gas prices.
- RSI divergence hints at near-term reversal
Natural gas prices have surged over 23% since the start of the month, erasing yearly losses and registering overbought readings on the RSI for the first time since November 2019.
Warmer medium to long-term weather forecasts and a record US natural gas power burn at the end of last month helped underpin the commodity, alongside resilient crude oil prices and a significantly weaker US Dollar.
The US Energy Information Administration (EIA) reported that “natural gas consumed by electric power plants (power burn) set a record high of 46.7 billion cubic feet on Monday, July 27” on the back of “high electricity demand for space cooling” and relatively high levels of nuclear power plant outages.
Source – EIA
The marked increase in US industrial consumption seemed to spark the 2-week rally from the July low (1.605) and resulted in price pushing back above the psychologically pivotal $2 mark for the first time in two months.
However, with European storage facilities at 87% of capacity and coronavirus cases climbing by more than 50,000 a day in the United States, natural gas could be at risk of a near-term correction.
Should the increase in industrial consumption fail to counterbalance growing supply concerns and the possible tightening of virus-imposed restrictions.
Source - Bloomberg
Furthermore, OPEC+ crude oil output is set to rise this month, with the cartel hiking its quota by 2 million barrels-per-day in expectations of increasing global demand.
This could potentially result in a supply glut, weighing on oil prices and in turn dragging on the performance of natural gas.
With that in mind, there is a distinct possibility that gas prices may have extended beyond the fundamentals, with a near-term correction back towards the $2 mark a distinct possibility.
Natural Gas Daily Chart – Pullback to 2019 Low on the Cards
Natural Gas Futures daily chart created using TradingView
From a technical perspective, the medium to long-term outlook for natural gas seems relatively bullish.
Guided higher by an ascending Schiff Pitchfork, alongside the most extreme readings seen on the RSI and MACD indicators since price set the November 2019 high (2.905).
Nevertheless, a pullback to support at the 2019 low (2.029) looks on the cards, as the RSI fails to follow price to higher highs. Hinting at underlying exhaustion in the recent uptrend.
A daily close below the May high daily close (2.134) could ignite a temporary pullback to the sentiment-defining 200-day moving average (1.955). If sellers can overcome significant support at the 2.00 level.
On the other hand, a break of resistance at the monthly high (2.284) may intensify buying pressure and carve a path for price to test the 161.8% Fibonacci expansion (2.401).
-- Written by Daniel Moss, Analyst for DailyFX
Follow me on Twitter @DanielGMoss
